By Sabrina Karl
If you’ve never opened one before, certificates of deposit can seem daunting. But once you understand them, CDs are simply another form of savings account, just with stricter rules on getting your money back out.
So why put money into CDs, and when are they a better choice than a regular savings or money market account? The answer boils down to your time horizon for needing the funds.
The conventional wisdom on investing in the stock market is to only use money you won’t need for five years or more. So for savings you’ll want sooner than that, stashing the cash in an interest-earning bank account is often a good move.
Savings and money market accounts operate essentially the same, allowing you to deposit and withdraw funds anytime you want so long as you don’t exceed six withdrawals in a month.
These are great if you aren’t sure what you’ll use your savings for or when you’ll need it. But if you’re working towards a specific goal, like a house down payment or buying car, or simply have more cash than you’ll need for awhile, CDs offer some advantages.
For one, CDs generally pay more interest than savings accounts. You’ll need to shop around, but the interest premium over savings accounts is not hard to find, especially for certificates with terms of 2 or more years.
Second, while CDs require you to keep your money in the bank for the chosen term or risk incurring a penalty, this restriction makes it easier to resist temptation on spending down your savings.
The bottom line is that, when you’re confident you can keep your funds on hold for awhile, CDs will earn you more interest than savings and money market accounts, while also generally enforcing you’ll keep the money saved.